How to avoid a monster mortgage: Only buy what you can afford
Buying a house is one of the most significant investments you are going to make, emotionally and financially. And, despite the recent fall in property prices, a home in any of the Australian capital cities does not come cheap.
According to the latest data released by ABS, the average loan size in Australia was $400,100 in May 2018. First home buyers borrowed, on average, a little less than $350,000 to purchase their home. Of course, in the more expensive cities of Sydney and Melbourne, buyers have to borrow much more to afford a decent sized property in the area.
Budgeting for your purchase
If you are planning to buy a home, it is likely that you’d need to take out a home loan. But are you aware of how much money you can borrow?
You could use an online calculator to determine your borrowing capacity or speak to a lender; but is it a good idea to borrow the full amount a lender is willing to lend you?
According to Susan, a mortgage broker, most home buyers are so focused on saving a deposit to afford a mortgage for their first home that they forget to consider the repayments they are going to make in the years to come.
“Interest rates could change, your circumstances could change, and you might find yourself stretching your finances too much to afford your repayments in the future,” says Susan, who explains that planning ahead could save you from the clutches of a monster mortgage. Let’s see how:
Plan your cash flow:
While it is natural that your income is going to increase in time, there could be limiting circumstances you might be able to foresee at the time of taking out your mortgage. For example, if you plan to have children in the near future, your monthly expenditure would increase. Besides, you or your partner might decide to reduce your working hours to bring up the kids – which would also affect your total income and spending power. However, if you are tied down with a large home loan, such a scenario might not be possible for you.
It is, therefore, vital to consider your present and future cash flow, both, before taking the plunge. This also means counting your monthly repayments at a higher interest rate to cushion yourself against future rate hikes.
Make informed choices:
According to experts, if you are spending more than 25 per cent of your income towards servicing your home loan, you could be under mortgage stress.
Banks ascertain your serviceability on set lending standards. However, it is you, who can best judge how much you can stretch your finances to accommodate a certain size of a home loan.
Here, the question of a deposit also kicks in. With a 20 per cent deposit, you avoid LMI (reducing the cost of your loan) and also have some ready equity in your home. On the contrary, if you take out a low deposit home loan, then, you have no buffer. Yet, after crunching the numbers, if you think you can afford a mortgage, but don’t have an adequate deposit saved up, it could be worth buying a home sooner than later when property prices escalate. A mortgage broker could help you understand your situation better.
Get a tailored home loan:
Remember, there is no one glove fit all formula when it comes to your mortgage. It is common knowledge that a shorter term means you pay lesser money in interest. While it is a sound strategy for some, for others, it may translate into much higher monthly repayments. As a home borrower, you may prefer a longer term so that you have lower monthly repayments. This may also help you build your savings faster, that you could redraw or access through an offset account in the case of an emergency.
Having a realistic budget for your property purchase is highly recommended, but it does limit your choices. As a result, home buyers often need to compromise on the price, location or the size of their home so that it fits their budget. However, it isn’t necessarily a bad thing – as there is no point in owning an elegant home that you can ill-afford to enjoy.
According to Susan, if you are looking for an affordable deal, try to pinpoint the upcoming suburbs in your area of interest. Upcoming suburbs fringe the localities where the property market has already boomed. Thus, you get the advantage of a lower entry point and access to all the facilities in the neighbourhood.
You could also choose to rentvest, says Susan, but she urges rentvestors to understand their role as a landlord before making a decision.
According to a study by HashChing, rentvestors are under extreme financial stress. This could be attributed to “underestimating the costs and responsibilities of being a landlord,” according to HashChing CEO Mandeep Sodhi.
“There’s a lot more involved than just making sure your rent and mortgage are paid off every month. As a landlord, you need to factor in many additional and ongoing costs, from renovations, repairs, and maintenance through to strata fees, land tax, landlord insurance, and property manager fees,” Mr Sodhi said, stressing on the importance of planning your present and future cash flow before buying a property.
Speak to a mortgage broker
Traversing the house finance market is more comfortable with an expert by your side. Your mortgage broker is a financial expert who will assess your finances in detail, and help you make educated decisions regarding the size of the loan you can service, in addition to introducing you to home loan features that could save you money.
If you plan to buy a home or have any home loan related queries, speak to a mortgage broker now or fill up this contact form so that we can put a verified mortgage broker in touch with you immediately.
By Vidhu Bajaj,
HashChing Content Writer